What are the requirements of perfect competition?


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Several basic requirements have to be met under perfect competition (PC) industry model:

  1. There are many buyers and many sellers.
  2. The industry consists of a very large number of firms each of which produces only a very small part of the total output.  This means that it is not possible for the actions of one firm to influence the price of the product. The firm in the industry is simply a price taker.
  3. Firms produce homogenous products i.e. no brand loyalty so that the consumer is totally indifferent as to which producer he buys from.  No product differentiation.
  4. All firms and all consumers are assumed to have perfect knowledge of the market conditions so that everyone knows the prevailing market prices of all commodities.
  5. New firms can enter or leave the industry if they wish.  There are no legal restrictions on entry and exit nor are there any high costs or barriers to entry.
  6. Every firm can obtain as much of each factor of production as is wishes at the prevailing price.  Firms determine their level of output.
  7. No transport costs and so prices are the same at different places.

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